401(k) Loans: Pros and Cons

May 5, 2014

Share This Story

Tapping your tax-advantaged
retirement savings seems like a desperate financial move (because it is), yet
also a sound one in specific circumstances. Best know what you get into with
401(k) loans in terms of time, payback and risk.

Many
holders of 401(k)s do in fact tap their accounts. According to 401k.org, about 20% of Americans
eligible for a 401(k) loan have one, with balances averaging $7,600.

The
amount of your loan usually starts at about $1,000 and maxes out at the lesser
of half your vested account balance or $50,000. While interest rates vary by plan,
most common is theprime rate plus 1%.

Unless
you borrow to buy a home, you must fully repay most 401(k) loans within five
years, often on a monthly schedule. Usually, you repay directly out of your
paycheck on an after-tax basis and may repay all at once with no penalty.